INTELLECTUAL PROPERTY LAW - WORLDWIDE
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Michelle AngThe company name is only visible to registered members.5 Essential Steps to Acquiring IP in China
5 Essential Steps to Acquiring IP in China: Managing technology issues in China M&A
by Alan Adcock
The Essential Steps to Acquisition
When Chinese technology is being acquired, companies should conduct due diligence on that technology to verify several key issues. First, a company should identify the technology to a degree sufficient to confirm that it fits its needs. Second, the company should confirm that the seller owns the technology and whether any state funds were used in its development. Third, the company should ensure that the technology does not infringe upon any third party’s intellectual property (IP) rights.
Due diligence on registered IP (normally patents and designs, but occasionally trademarks and copyrights) is generally straightforward, but unregistered IP (normally in the form of trade secrets or confidential information) can be trickier. Comprehensive due diligence should also analyze previous transactions and other relevant agreements that may affect what can be done with the target IP.
1. Identifying the Technology
A Chinese seller should be able to describe the technology in enough detail for a buyer to understand the technology fully. This can be a simple step if the target technology is a product, but if it is a process, then the description may be more complicated, especially if the process is a trade secret kept in the heads of a small reference group or in an operator’s manual that the seller may not want to share until the deal is completed. The parties to a transaction can address this problem with a nondisclosure agreement.
Identification is also critical to determine whether the technology falls within certain categories of “prohibited,” “restricted,” or “free” technologies as set out in the 2002 Regulations for the Administration of Technology Import and Export, the principal guide for foreign acquisition, use, and export of Chinese technology. If the technology belongs to the prohibited or restricted category, it may not be transferable at all, or only with government approval.
2. Confirming Ownership
Determining whether the seller actually owns the technology normally requires several meetings with relevant technicians to understand how the technology was developed. If no longer with the company, where are those technicians now? Were any state funds involved in the development? If external subcontracted testing and development were involved, to what degree might input give rise to third-party inventorship rights to the technology? It is crucial for a prospective buyer to know how the technology was developed, by whom, when, and with whose funds.
Additionally, a prospective buyer should thoroughly review the employment agreements of the employees who assisted in the development to confirm that the seller owns the employees’ contributions, whether the seller has imposed and enforced confidentiality restrictions, and whether the employees have been “reasonably remunerated” for their contribution to the technology, as required under PRC law. These steps will allow a buyer to avoid future claims by the employees responsible for its development.
Prospective buyers also should ensure that legal due diligence includes a complete review of all licenses, rights to acquire, liens or other forms of security over the technology and the like. In particular, buyers should investigate whether the technology’s licensees have been involved in counterfeiting or breach of agreement actions, have IP protection measures in place, produce for competing brands, or have third party or subcontractor involvement in the licensed IP. Buyers should also perform a “brand hygiene check” to ensure the licensees’ ethical, regulatory, and environmental compliance. Last but not least, buyers should investigate the licensee’s tooling and equipment used in manufacturing. Buyers should also review copies of any executed powers of attorney into which the seller has entered.
3. Assuring Non-infringement
To address the possibility of infringement, a buyer should normally begin with a “novelty search” at SIPO to obtain an authoritative opinion on whether the technology is new and inventive, two of the three criteria for patent ability. This search could aid a buyer if the seller has not made the technology public and if the technology is still suitable for patenting.
The novelty search also identifies patents, patent applications, and publications, which can help the buyer determine whether a seller may have infringed upon third-party IP rights.
4. Obtaining Further Assurances
If, after the due diligence is completed, questions remain unanswered, a buyer may want to obtain statements from the seller and, if necessary, from the relevant technicians. Such statements would confirm that all disclosures made during the course of the due diligence are true and would indemnify the buyer against liability for infringement of IP rights if such an infringement stems from something that was not disclosed or disclosed incorrectly. After obtaining these statements, the parties can draft an acquisition agreement to keep the deal alive, though, in the case of restricted technology, such an agreement does not take effect until the government approves it.
5. Government Approval
The Regulations for the Administration of Technology Import and Export specify the procedures for government review and approval of technology acquisition deals in China. Technology in the prohibited category may not be exported, so agreements involving this kind of technology is illegal.
Restricted technology can be exported, but only after obtaining an export license from the government. Agreements relating to free technology, which constitute the bulk of technology acquired from PRC entities, only needs to be registered. The process involves an online application and approval by the local authority in charge of foreign trade, who issues a registration certificate. Agreements that involve free technology takes effect when it is executed.
For more information, please go to
http://rightsite.asia/en/article/5-essential-steps-acquiring...
- 01 Feb 2010, 6:17 pm
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Michael ColeThe company name is only visible to registered members.Re: 5 Essential Steps to Acquiring IP in China
Hi,
Thanks for sharing your experience about IP in China.
Regarding the potential for disputes with employees of the company that owns the IP, you recommend leaving this to be resolved by the local company and the employee, which sounds like a good strategy. However, assuming that the IP rights are being acquired by the foreign buyer acquiring the local company, what is there to prevent this potential liability from being transferred along with the IP assets? Can a contract be structured to protect against such liabilities and are such contracts enforceable in a system that tends to favour employees over employers?
Also, thanks for contributing your knowledge regarding the licensing procedures -- this was very helpful and if you would like to have these comments also published along with the original article on RightSite.asia (http://rightsite.asia/en/article/5-essential-steps-acquiring...), then we would welcome your contribution there.
Best,
Michael Cole
- 03 Feb 2010, 08:33 am
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Michael ColeThe company name is only visible to registered members.
Re^2: 5 Essential Steps to Acquiring IP in China
Hi Klaus,
Thanks for the clarification.
Actually, I would urge people to work with the Chinese original texts in any case, as these are the official documents and they tend to more clearly convey the author's meaning.
Best,
Michael Cole
- 07 Feb 2010, 3:02 pm
